Crypto Loans Tutorial: How to Borrow Against Bitcoin & Crypto

MoneyZG

Introduction to Crypto Loans

Crypto loans allow users to borrow money against the value of their cryptocurrency assets. The main way to do this is by putting a crypto asset onto a platform and borrowing stable coins, such as USDT or USDC, against it.

Key Terms

  • Collateral: The crypto asset used to secure the loan.
  • Loan to Value (LTV): The percentage of the collateral's value that can be borrowed. Most platforms offer a maximum LTV of 75-80%.
  • Margin Call: A notification sent when the collateral's value falls below a certain threshold, requiring the borrower to add more collateral or repay the loan.
  • Liquidation: The process of selling the collateral to repay the loan when the borrower fails to meet the margin call.

Types of Crypto Loans

  • Variable Rate Loans: Offer variable interest rates and flexible repayment terms.
  • Fixed Rate Loans: Provide fixed interest rates and repayment terms, but are less common in the crypto space.

Centralized Finance (CeFi) vs Decentralized Finance (DeFi)

  • CeFi: Centralized platforms that hold users' assets and offer loans, but come with risks such as platform insolvency and asset seizure.
  • DeFi: Decentralized platforms that use smart contracts and allow users to maintain custody of their assets, but come with risks such as smart contract vulnerabilities and market volatility.

Borrowing on CeFi Platforms

  • Users can borrow stable coins against their crypto assets on platforms like Binance.
  • The process involves depositing collateral, selecting the loan amount and terms, and repaying the loan with interest.

Borrowing on DeFi Platforms

  • Users can borrow stable coins against their crypto assets on platforms like Arve.
  • The process involves connecting a wallet, depositing collateral, selecting the loan amount and terms, and repaying the loan with interest.
  • DeFi platforms often use wrapped versions of assets, such as wrapped Bitcoin (WBTC), to allow borrowing against assets that are not native to the platform.

Risks and Considerations

  • Crypto loans come with risks such as market volatility, platform insolvency, and smart contract vulnerabilities.
  • Users should carefully consider these risks and do their own research before taking out a crypto loan.